is pension fund asset allocation really determined by ... · nat ional grd plc s ev rn tent plc...

W W W . W A T S O N W Y A T T . C O M

Is Pension Fund Asset Allocation Really Determined by Fundamentals?Mike Orszag

Paris, April 2, 2004

Copyright © Watson Wyatt Worldwide. All rights reserved.

Key Question

Do pension funds make asset allocation decisions based on corporate finance risk considerations?

Factors which might matter:– Size of pension scheme relative to company– Size of deficits relative to company– Maturity of scheme


Data

UK listed companies have had to report pension liabilities on FRS17 basis since late 2001

Collected roughly 150 data items for FTSE350 on corporate finance from FRS17 disclosures

Matched data to other data on market returns/option price data, betas, etc.


Accounting Dates

Roughly 48% of FTSE350 (168 companies) use Dec. 31 as end of year, 17% (60 companies) use 31 March, 8% (29 companies) use 30 September, remainder use a variety of dates

Define a panel with two waves:– 2001 Wave = Accounting dates between 30 June

2001 and 29 June 2002– 2002 Wave = Accounting dates between 30 June

2002 and 29 June 2003


Pension Surplus(Deficit)/Pension Liabilities

FTSE 350 companies with positive reported pension liabilities

257242N

-1.0%21.8%95%

-8.3%15.5%90%

-17.3%3.3%75%

-27.4%-7.7%50%-34.0%-15.2%25%

-43.7%-24.9%10%

-48.1%-30%5%

20022001Wave 2002 has only 10 companies with surpluses as opposed to 81 in 2001.

Among FTSE 100, wave 2001 has only 4 companies in surplus as opposed to 46 in 2001


Equity Allocation of Pension Funds

UK FTSE 350 – Calendar Year 2002 accounts Percentiles 1% .169485 5% .3179815 10% .4089045 Obs 254 25% .5425532 50% .6640593 Mean .6343839 75% .755668 90% .8119375 Variance .0278154 95% .8623853 Skewness -.7325749 99% .9631634 Kurtosis 3.641208

05

101

5P

erc

ent

0 .2 .4 .6 .8 1Equity share of total assets

FTSE 350: 2002

FTSE100 slightly lower median, lower mean


Equity Allocation of Pension Funds

Variation in equity share between 2001 and 2002 (FTSE 350) Percentiles 1% -.335226 5% -.1859357 10% -.1400082 Obs 231 25% -.0830409 Sum of Wgt. 231 50% -.046847 Mean -.0529932 Std. Dev. .0893082 75% -.0134888 90% .0074313 . 95% .0304655 99% .1343837

05

1015

Pe

rcen

t-.2 -.1 0 .1 .2

Change in Equity Allocation

Slightly bigger drop among FTSE100


Pension Liabilities/Market Cap (2001)

Vodaf one Group Plc

British Land Co Plc

Reu ters G rou p PlcLand Securities Plc

BG Group

In tern ationa l Po we r Plc

Compass Group

P & O Princess Cruises

Man Group Plc

WM Mor riso n S upe rmarkets Plc

WPP Group

Capita Group

3I Group PlcGlaxoSmithKline

O ld Mutu al P lcAs traZe ne ca Plc

N orth ern Roc k

Next PlcHays Grou p

Smith & Nephew

BHP Bill iton PlcAmersham PLC

Hilton Group PlcAnglo American Plc

Standard Chartered

Legal & General Group Plc

TescoGus Plc

Dixons Grou p P lc

BunzlRentokil Initial PlcHBOS Plc

BPHSBC Holdings Plc

Reckitt Benckiser Plc

Rio Tinto Plc

Friends Prov ident

Wolseley Plc

Schroders PlcAbbey NationalBradf ord & Bingley

Dia ge o

Cadbury Schweppes

BAA PlcAlliance and Leicester

Pearson PlcSix C on tin en tsJohnson Matthey

Prudential Plc

Kingf isher PlcLloy ds TSB Group Plc

Reed Elsev ierGallaher Group Plc

Saf eway PlcScottish and Southern Energy Plc

R oy al B ank of Sc otl an dAv iv a (f ormerly known as CGNU)

CentricaCable and Wireless Plc

EMI Group PlcBa rclays Plc

BOC Group Plc

National Grid Plc

Sev ern Trent Plc

British American Tobacco

Boots Company Plc

Associated British Foods PlcMarks and Spencer Plc

Granada Group Plc

Hanson Plc

J Sainsbury PlcScottish & Newcastle Plc

Imperial Tobacco Group Plc

Scottish Power PlcDaily Mail a nd General Trust PlcUnited Utilit ies PlcAl lied Do me cq Plc

Smiths Group

Unilev er Group

Ex el

Inv ensy s Plc

Roya l & Sun Allian ce Insurance PlcG KNBAE Sy stems

BT Plc

Lattice Group Plc

Rolls-Roy ce Plc

Imperial Chemical Industries Plc

British Airway s Plc

Corus Group

0.2

.4.6

.81

equi

ty_s

hare

0 1 2 3 4pension_liability__market_cap

bandwidth = .8

Pension Risk


Pension Liabilities/Market Cap (2002)

3i Group plc

Abbey National

Alliance and LeicesterAlliance Unichem plc

All ied Domecq Plc

Amersham PLCAnglo A meric an Plc

Associated B ritish Foods Plc

A straZeneca P lc

A VIVA (formerly known as CGNU )B AA Plc BAE System s

Barclays Plc

B G Group

BH P Bi lliton Plc

BOC Group Plc

Boots Com pany P lc

B P

Bradford & Bingley

Bram bles Industries Plc

British Ai rways plcB ritish A m erican Tobacco

B ritish Land Com pany PLC

B T PlcB unzl

Cable and Wire less P lcCadbury Schweppes

Capita Group

Centrica

Compas s Group

Corus group

Dai ly M ai l and General Trust P lc

Diageo

Dixons Group Plc

EM AP

EM I Group Plc

E xel

Friends Provident

Gallaher Group P lcGK N

GlaxoSm ithKline

Granada Group P lc

GUS Plc

Hanson Plc

Hays GroupHBOS Plc

Hilton Group Plc

HSBC Holdings Plc

Imperia l Chemical Industries Plc

Im peria l Tobacco Group Plc

International P ower P lc

Invensys Plc

J Sainsburys P lc

Johnson M atthey

Kelda Group Plc

Kingfisher Plc

Land Securities p lc

Legal & Genera l Group PlcL iberty International

Lloyds TSB Group Plc

Man Group Plc

Marks and Spencer P lc

mm O2

National G rid Transco

Next Plc

Northern Rock

Old Mutual PlcP & O Princess Cruises

Pearson Plc

Prudential Plc

Rec ki tt Benckiser P lcReed Elsevier

Rentokil In itia l Plc

Reuters Group Plc

Rexam plc

Rio Tin to P lc

Rolls-Royce P lcRoyal Bank of Scotland

Royal Sun & Alliance Insurance Plc

S AB Mil lerS afeway PlcSchroders P lc

Scottish & Newcastle PlcScottish & Southern E nergy PlcScottish Power PlcSevern T rent P lc

Six Continents

S mith & N ephew

Smiths Group

Standard Chartered

TescoTom kins

Uni lever Group

Uni ted Utili ties Plc

V odafone Group Plc

W hitbread

W M Morrison Supermarkets Plc

W olseley PlcW PP Group

0.2

.4.6

.81

equi

tysh

are

0 5 10 15bs1


Pension Surplus/Pension Liability (2001)

Vodaf one Group Plc

WPP Group

Amersham PLC

Compass GroupGKN

As traZe ne ca Plc

BG Group

P & O Princess Cruises

Northern Rock

Bri tis h Am eri ca n Tobacco

Dixons Group Plc

Scottish & Newcastle PlcCapita Group

Wolseley Plc

Cen tric a

Kingf isher Plc

Hil ton Group PlcHSBC Holdings Plc

Reckitt Benckiser Plc

J Sainsbury PlcBunzl

GlaxoSmithKline

La nd Se curi tie s Pl c

Smith & Nep hew

TescoRol ls -Roy ce Plc

Next Plc

Pearson Plc

Granada Gro up Plc

National Grid PlcMark s a nd Spe nc er P lc

Reuters Group Plc

Alliance and Leicester

BAE Sy ste msBT PlcBradf ord & BingleyGus Plc

3I Group Plc

Imperial Chemical Industries Plc

Man Group Plc

Abbey National

Standard Chartered

Roy al & Sun Alliance Insurance PlcCable and Wireless Plc

Anglo American PlcAllied Domecq PlcSix Continents

HBOS Plc

Inv ensy s Plc

Hay s Group

United Utilities PlcDaily Mail and General Trust PlcSc otti sh Power Plc

R en tok il Init ial Plc

EMI Gro up P lc

La ttic e Gro up Plc

Barclay s PlcSev ern Trent Plc

Roy al B ank of ScotlandBHP Bill iton Plc

Lloy ds TSB Group Plc

Bri tish Land Co Plc

WM Morrison Supermarkets Plc

Gallaher Group Plc

Scottish and Southern Energy Plc

Av iv a (f ormerly known as CGNU)

Sa feway Plc

Cadbury Schweppes

Boots Company Plc

Bri tish Ai rway s Plc

BOC Group Plc

Legal & Gene ral Grou p Plc

Unilev er Group

BP

Reed Elsev ier

Old Mutual PlcSm ith s Group

Rio Tinto PlcHanson Plc

Pru de ntial P lc

Imperial Tobacco Group PlcInternational Power Plc

Corus Group

Johnson Matthey

Diageo

Schrode rs Plc

Associated British Foods PlcExel

BAA PlcFriends Prov ident

0.2

.4.6

.81

equi

ty_s

hare

-.6 -.4 -.2 -5.55e-17 .2 .4pension_surplus__def icit___pensi

bandwidth = .8

Pension Risk


Maturity

FTSE350- 20020

.2.4

.6.8

1E

qu

ity s

hare

of t

ota

l ass

ets

0 1 2 3sc5

bandwidth = .8

Lowess smoother


Changes in Equity AllocationRegression for Change in Equity Allocation

Lag BS1 -0.008(0.67)

Lag BS7 0.109 (2.85)**

ftse100 -0.028(2.24)*

Lag PL1 -0.004(0.93)

Constant -0.026(2.43)*

Observations 229R-squared 0.05Absolute value of t statistics in parentheses •significant at 5%; ** significant at 1%BS7 is not statistically significant if robust regression methods are used.

-.5

0.5

diffe

q

-.6 -.4 -.2 0 .2 .4bs7

bandwidth = .8

Changes in Equity Allocation of Pension Funds


Conclusions

Not much connection between fundamentals and asset allocation

Results hold in both cross-section and panel regressions

is pension fund asset allocation really determined by ... · nat ional grd plc s ev rn tent plc...

Documents